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Beaufort Securities Breakfast Alert: Karelian Diamond Resources, AstraZeneca, Avation, Tullow Oil, Wood Group

Published: 03:37 11 Apr 2016 EDT

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The markets
Europe
The FTSE-100 finished Friday's session 1.10% higher at 6,204.41, whilst the FTSE AIM All-Share index closed 0.33% higher at 719.39.. Continental markets ended in the green, driven by positive exports data released in Germany and a rally in banking stocks. Moreover, an increase in commodity prices boosted basic resource stocks. France's CAC 40 and Germany's DAX advanced 1.4% and 1.0%, respectively.
Wall Street
Wall Street ended higher, led by a rally in energy stocks amid rising oil prices. Investors focused on corporate earnings and economic data released in the US. The S&P 500 gained 0.3% in Friday's trading session. For the week, the markets fell 1.2%, the highest weekly loss since February.
Asia
Equities are trading mixed, as sell-off in Japan's market due to a stronger yen offset gains in Chinese stocks. However, improving oil and commodity prices lifted the energy sector. The Nikkei 225 declined 0.4% amid weak data on core machinery orders in Japan. The Hang Seng was trading 0.4% up at 7:00 am.
Oil
On Friday, WTI and Brent oil prices increased 6.6% and 6.4%, respectively. The spread between the two varieties stood at US$2.2 per barrel.

Headlines
Industrial output in UK falls in February
As per the Office for National Statistics, the UK's industrial output contracted 0.5% y-o-y in February, registering the highest fall since August 2013, after gaining 0.1% in January. Furthermore, manufacturing output dropped 1.8% y-o-y in February after a 0.3% decline in January. The fall in output was due to weak demand for commodities and slowdown in the global economy.

Company news

Karelian Diamond Resources (LON:KDR, 0.75p) - Speculative Buy

Karelian Diamond Resources, the diamond exploration company focused on Finland, announced today results of garnet analyses (355) by Rio Tinto Mining and Exploration Limited, with whom the company has a confidentiality agreement (with back in rights), suggesting that the Kiihivaara kimberlite had sampled the diamond stability field. Outcrop and till samples collected by Karelian, were analysed by Rio Tinto Mining and Exploration at its Melbourne laboratories in Australia. Screening followed by laser ablation ICP-MS (inductively coupled plasma-mass spectrometry) revealed that lherzolitic (G9) garnets were dominate with scattered harzburgitic (G10). Analysis from the outcrop sample also indicated eclogitic garnets with restricted range in chemical composition of potential diamond association. Thermobarometry was done on the garnets and the estimated geotherm is prospective for diamonds and is similar to that in the Kaavi-Kuppio kimberlite field in Finland and to kimberlite fields in South Africa.

Our view:Based on the results to date, the Riihivaara Kimberlite has the potential to be diamondiferous. We are encouraged with identification of G9 and G10 garnets within the samples given that these indicator minerals are associated with diamonds. Moreover, the presence of G10 garnets is very encouraging given their strong compositional and pressure-temperature association with diamonds and are thought to be produced within the diamond stability field. As such, we reiterate a Speculative Buy on the stock.

Beaufort Securities acts as corporate broker to Karelian Diamond Resources Plc

AstraZeneca (LONL:AZN, 4,146.50p) - Hold

AstraZeneca, a global biopharmaceutical business, and its partner Eli Lilly and Company ('Lilly') on Friday announced that AMARANTH, a Phase II/III study of AZD3293, an oral beta secretase cleaving enzyme ('BACE') inhibitor currently in development as a potential treatment for early Alzheimer's disease, will continue into Phase III of the Phase II/III seamless trial. The AMARANTH independent data monitoring committee recommended the study continue without modification after a scheduled interim safety analysis was conducted. The analysis was not designed to review efficacy. Under the terms of the agreement, AstraZeneca will receive a further milestone payment of US$100m from Lilly which will be reported as Externalisation Revenue in AstraZeneca's financial statements and does not change the financial guidance for 2016. AstraZeneca and Lilly have also announced the planned initiation of a new Phase III trial for AZD3293. The trial, named DAYBREAK, will study the safety and efficacy of AZD3293 in people with mild Alzheimer's dementia. DAYBREAK will begin enrolling participants in the third quarter of 2016.

Our view: Continuation to Phase III part of the Phase II/III seamless trial for AMARANTH is positive, albeit largely anticipated, news for AstraZeneca. AstraZeneca and Lilly takes joint responsibility of AZD3293/LY3314814 for commercialisation of the molecule and will share all future costs equally throughout development and commercialisation, as well as net global revenues post-launch. AZD3293 has been shown in Phase I studies to reduce levels of amyloid beta in the cerebro-spinal fluid of people with Alzheimer's disease and healthy volunteers. The progression of Alzheimer's disease is characterised by the accumulation of amyloid plaque in the brain. BACE is an enzyme associated with the development of amyloid beta. Inhibiting BACE is expected to prevent the formation of amyloid plaque and eventually slow the progression of the disease. Alzheimer's disease is the most common form of dementia, accounting for 60% to 80% of all indications. The total estimated worldwide cost of dementia in 2015 was US$818bn which by 2018 is forecast to become a trillion dollar disease, rising to US$2 trillion by 2030. The Group has been working on various diseases in the development phase recently, which will take some years before being able to commence revenue generation. Additionally, AstraZeneca has been facing some growth-related concerns, as some of its key medicines approach patent expiry in the near future and may be substituted by cheaper generics. In view of the mixed outlook surrounding the Group, we maintain a Hold rating on the stock.

Avation (LON:AVAP, 137.0p) - Speculative Buy

On Friday, Avation released a market update on aircraft fleet metrics. The company had a fleet size of 37 at the end of March 2016, compared with 33 at the end of 2015. The average age of its aircraft has dropped to 4.5 years from 5.2 years. The remaining lease term average at the end of March 2016 has increased to 6.7 years from 5.7 years at the end of 2015. Avation's fleet utilization stood at 100%.

Our view: This is a positive update for Avation, as it has added four aircraft to its portfolio. Additionally, the company has managed to achieve 100% fleet utilization as well as reduce the average age of its aircraft. In March 2016, Avation successfully delivered a second batch of Airbus A321-200 aircraft to Thomas Cook Airlines, thereby honouring a contract for leasing out two new aircraft. In addition, the company completed the acquisition and delivery of a fourth ATR 72-600 aircraft to Flybe Group. We appreciate Avation's progress in the first three months of 2016 and look forward to further updates. We maintain a Speculative Buy rating on the stock.

Tullow Oil (LON:TLW, 196.60p) - Speculative Buy

On Friday, Tullow Oil released an operational update on the Jubilee field in Ghana. A technical investigation at the field has confirmed that the turret bearing on the floating production and storage and offloading (FPSO) vessel is damaged and unable to rotate as per the original design. Tullow is currently placing new arrangements and expects operations to resume in about two weeks. The company is conducting a root cause analysis, and a project team is evaluating the use of a long-term remediation process. Meanwhile, new operating procedures, including the use of a dynamically positioned shuttle tanker and a storage tanker, have been implemented for safe production and off-take operations. Tullow has an exhaustive insurance, which covers damages to the FPSO, and business interruption insurance for the loss of production and revenue. The company has notified claims for the policies to the insurers. Tullow would reissue its production guidance for the year after production rates stabilise.

Our view: The damage to the bearing on the FPSO vessel is a minor setback to Tullow's Jubilee field. The company was swift in its response to the issue. It has assigned an experienced project team to identify a permanent solution. Initial feasibility studies have confirmed that the issue can be fully resolved. In addition, Tullow's operations team is working on ensuring safe and viable measures for production from the field. Moreover, the company has insurance packages to cover operating and capital costs related to the damage, along with revenue coverage. We believe the current crisis would be short-lived, and the company would achieve normal production rates soon. Earlier this month, Tullow said the Wisting Central II long-reach horizontal well (7324/7-3S) had successfully explored and appraised the Wisting South and Wisting West segments of the field. Drilling results show that the well has encountered an oil column of 22 metres in a 1,402-metre horizontal section with 1,250 metres of net light oil pay. Overall, the company is progressing well across its assets, with substantial resources to offset the impact of the current challenges. Therefore, we maintain our Speculative Buy rating on the stock.

Wood Group (LON:WG., 610.0p) - Buy

On Friday, Wood Group acquired Ingenious Inc, a supplier of proprietary software and consulting services to the global chemical, oil and gas, and energy industries. Ingenious provides consulting and engineering services to support software sales and non-software-related services (such as process engineering, design and simulation, and process safety management).

Our view: The Ingenious acquisition follows Wood Group's takeover of Australia-based SVT Engineering Consultants. Through the acquisition of Ingenious, Wood Group Mustang would gain strong manufacturing operations management (MOM) capabilities. This would allow the Group to build on and diversify its automation and control business. Wood Group plans to leverage Ingenious's capabilities in the operator training simulator market to improve its control system simulators, training tools and services. Moreover, the acquisition of SVT has led to improvements in Wood Group's vibration, dynamics and noise engineering services. SVT would operate within Wood Group's Kenny business. Wood Group is likely to benefit from SVT's large client base, which covers the (onshore and offshore) oil and gas market, including the LNG, mining, and power and utilities sectors. We believe the recent acquisitions and contracts would contribute to Wood Group's growth prospects. Therefore, we maintain a Buy rating on the stock.

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